Stocks Fall Ahead of Fed Decision

Somber news of worsening economic conditions reasserted itself as rallies in battered sectors faded, pulling equities lower

by David Bogoslaw

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Bargain-hunting in beaten-down sectors such as homebuilders, airlines and financials proved to be insufficient to prevent major U.S. stock indexes from ending lower on Tuesday, giving in to pressure from a profit warning from United Parcel Service (UPS) and more negative economic data that showed further slippage in home prices and consumer confidence.

On Tuesday, the Dow Jones industrial average closed 34.93 points, or 0.29%, lower at 11,807.43. The broader Standard & Poor's 500-stock index was down 3.71 points, or 0.28%, at 1,314.29. The tech-heavy Nasdaq composite index shed 17.46 points, or 0.73%, to finish at 2,368.28.

As seen on Monday, investors appeared hesitant to take on major new positions ahead of Wednesday's conclusion of a Fed policy meeting, S&P MarketScope said. While the Fed is widely expected to leave interest rates unchanged, what it will say about future action remains unclear. On the New York Stock Exchange, 22 stocks fell in value for every 10 that gained ground, while on the Nasdaq the ratio was 21-8 negative.

The dollar weakened on the new batch of gloomy economic data, while gold and oil prices gained strength.

The bargain-hunting for airlines and homebuilders seemed perverse, but the rally in financials at least appeared to be motivated by a Dow Jones Newswires report that UBS AG (UBS) was trading higher on market talk that HSBC could bid up to $80 billion to take over the Swiss bank. UBS shares ended nearly 7.0% higher.

American Express (AXP) showed a big gain, while Citigroup (C), Merrill Lynch (MER) and Goldman Sachs (GS) finished well off their intraday highs.

United Parcel Service shares dropped 6.0% after the world's largest express and package delivery company cut its second-quarter earnings outlook from 97 cents to $1.04 to 83 to 88 cents s share, citing slow U.S. economic growth and an "unprecedented" increase in the cost of fuel. Standard & Poor's downgraded the stock to hold from buy, and Robert W. Baird downgraded it to neutral from outperform.

Spiking fuel costs are wreaking havoc in other industries, too. United Airlines (UAUA) said it is laying off 950 pilots and reducing its fleet by 100 aircraft, while Dow Chemical Co. (DOW) confirmed a $300 trucking surcharge, a $600 rail freight surcharge and a 25% price hike in July along with production cuts.

Leading the week's batch of new economic data, the Consumer Confidence Index plunged to a 16-year low of 50.4 in June, well below the median forecast of 56.1, after a reading of 58.1 in May.

All the confidence measures are now showing massive declines since August, 2007 despite the surprising resilience of consumer spending relative to after-tax income, as soaring prices are boosting nominal spending while fueling public angst. While there are plenty of reasons for pessimism, it's the explosive surge in prices that explains the sizable discrepancy between confidence readings and the monthly spending figures, made clear with the last round of big retail sales gains right alongside the array of new record lows being set by the various confidence measures, according to Action Economics.

The Standard & Poor's/Case-Shiller Home Price Index of 20 cities fell 1.4% in April after a 2.2% drop in March, with Miami and Phoenix showing the worst declines in home value and prices starting to rise in some other cities. The 20-city index was down more than 15% from a year ago, however, the biggest drop since its inception in 2000.

The U.S. Treasury Department's $30 billion auction of 2-year bonds was very well received, even amid some uncertainty over the Fed's policy statement to be released Wednesday afternoon.